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Monday, June 25, 2018

The False Hope of WesternGeco

Posted by
Michael Risch

The Supreme Court issued its opinion in WesternGeco last week. The holding (7-2) was relatively straightforward: if an infringer exports a component in violation of 35 USC 271(f)(2) (that is, the component has no substantial noninfringing use), then the presumption of extraterritoriality will not bar damages that occur overseas. And that's about all it ruled. It left harder questions, like proximate cause, for another day.

I spent the end of the week and weekend reading commentary on the case (and tussling a bit on Facebook and Twitter). A couple blog posts worth checking out are Tim Holbrook's and Tom Cotter's. I had just a few thoughts to add.
1. This was an easy case, and it's surprising it took this long to get here. 35 USC 271(f)(2) allows for infringement due to exporting a component of an infringing good because it was an end run around exporting the whole product. It stands to reason that if you lost a sale of the whole good in a foreign market because of that export, then you should be compensated for it. Why else have the (f)(2)? Justice Gorsuch's dissent describing the history of the Deepsouth case only makes this clearer. In Deepsouth, the Court held that exporting a part didn't count, and Congress said, "Oh, yes it does." It is telling that the majority doesn't even cite Deepsouth, yet the dissent and many lower court extraterritoriality opinions do.

2. That doesn't mean that every type of damage in the foreign jurisdiction should count. Causation matters, and as I'll discuss below, proximate causation is where the action will be in the future. It's frankly where the action should have been all along. The only reason causation wasn't the centerpiece is that the courts used the extraterritoriality question as a heuristic to avoid the harder causation questions. Thus, I suppose much of the angst about this case is that causation for the "lost contracts" type of damages is so bound up with extraterritoriality--and that extraterritoriality is just a cleaner way to deny damages that people think should not be allowed on causation grounds. But I've never been one for clean ways to deal with hard policy questions. Have you read my Section 101 scholarship lately?

3. In any event, I'm surprised by the surprise that proximate cause was not addressed. The question presented was very straightforward: is extraterritoriality an absolute bar to damages in this case? And the Court answered that question: No. In this era where really big partisan gerrymandering cases are decided on lack of standing (and other narrow opinions), it comes as no surprise at all that the Court answered the question asked and only question asked, notwithstanding the desperate pleas of amicii everywhere.

4. Finally, with respect to causation and expansion of damages, I don't think this case spells doom, but I do think that we'll see partial reversal of some cases. Take what I say with a grain of salt - I think Rite Hite v. Kelley is correctly decided as a causation matter. If you don't, well, you're head is probably going to explode, because broader causation will likely lead to a bit more foreign damages, even in 271(a) cases. But I don't think it will be crazy foreign damages. Let's look at the two 271(a) type cases everyone is talking about:

Power Integrations v. Fairchild: Power Integrations claimed damages for foreign infringing sales based on U.S. sales due to foreseeability (e.g. becoming a market leader and thus selling more.) The Federal Circuit mixed extraterritoriality with causation (won't be able to do this so much anymore), but winds up echoing WesternGeco's holding that the damages must be tied to U.S. infringement, and that there's no causation:

Power Integrations has not cited any case law that supports an award of
damages for sales consummated in foreign markets, regardless of any
connection to infringing activity in the United States. To the contrary,
the entirely extraterritorial production, use, or sale of an invention
patented in the United States is an independent, intervening act that, under almost all circumstances, cuts off the chain of causation initiated by an act of domestic infringement.

So, Power Integrations comes out the same way.

Carnegie Mellon v. Marvell: Two types of foreign damages were alleged. First were foreign sales of chips practicing a patented method. Second were foreign sales of chips designed using a patented method. The first types of damages don't change after WesternGeco. The chips were made and sold outside the U.S., and have no tie to domestic infringement, as required by WesternGeco.

But the more intriguing claim is to the chips designed by a patented design process, but made overseas. I frankly don't know how this comes out. Under WesternGeco, there is potentially no extraterritoriality defense because the foreign chip manufacture and sale flows from the domestic infringement. Or does it? Probably, if the question is compensating someone for harms. But causation is the more interesting question. I think this is more difficult than the straw person Justice Gorsuch creates (an infringing U.S. prototype); I agree with Tom Cotter that prototype damages causation is weak. But design method causation? I don't know, and I haven't done the research to see if there are any cases on this.

But my takeaway is the same - the answer to this question rests where it should: on causation. If you're outraged that damages would be owed due to infringement in the design process, then why should that outrage be lessened for U.S. product sales? Either damages that flow from such infringement should be allowed or they shouldn't, regardless of where they take place.

5. The final question is whether this affects business location. How many design and sale activities will move offshore to avoid damages? We'll see if this case has that effect, though it wouldn't be too surprising to see at least some shift.